A spokesman, speaking to The Guardian confirmed:
"The BBC has confirmed that the BBC3 drama series Phoo Action will not now be going into production. During the course of pre-production it became clear that creatively Phoo Action was struggling to fulfil its ambitions as a television drama so the decision was taken to cancel it.
"BBC3 is still very interested in Phoo Action as a concept however and is looking into whether or not it may come back in another form in the future. Meanwhile, BBC3 continues to be wholly committed to developing innovative and original television dramas for its audience. Forthcoming titles confirmed for next year include PA's and Being Human."
I didn't like the Phoo Action pilot (read my review here) and didn't think it deserved a full series. Sure, it was visually very different and a change from the bland studio-based comedies BBC Three are known for, but that shouldn't have mattered. It was still terrible. Still, while I won't be crying over its loss, it's an unfortunate mess for a stack of other reasons: a reported £200,000 worth of set-building has been wasted, 70 jobs have been lost, and the BBC will have to compensate actors who had turned down other roles for this project. It's estimated that cancelling Phoo Action will cost the Beeb a total of £500,000.
So, it was a costly decision to shut down the production -- but the creative concerns must have been huge for the Beeb to take such drastic measures. It's hard to imagine scripts being worse than the pilot's, though, isn't it? This is BBC Three, remember -- a channel not exactly known for their quality control (see: Two Pints Of Lager & A Packet Of Crisps.)